Education Funding

Whether you want to help your child attain a brighter future or are thinking about going back to school yourself, there are many ways you can start saving now for future education expenses. Given the reality of fast-rising tuition costs, it’s more important than ever to take advantage of potentially tax-efficient options that may help you meet the financial challenges of higher education costs. You have a variety of potential solutions to choose from, and now is the time to start. U.S. Bank and U.S. Bancorp Investments, Inc. can provide products and services to help.

All dollars accumulated in a plan can qualify for tax-free withdrawals, giving you more freedom to focus on other financial goals. You and others (such as grandparents) can invest money in a 529 plan for the benefit of specific individuals. Dollars saved are typically invested in mutual funds. Earnings accumulated in the plan are not subject to federal taxes and, in many cases, state taxes (if you’re a resident of the sponsoring state) – as long as funds are used for qualified higher-education expenses like tuition, housing and books/equipment. States, state agencies and educational institutions sponsor 529 plans. Tax benefits vary by state and plan.

Before investing in a 529 College Savings Plan, consider your state of residence, which may offer a 529 College Savings Plan with state tax or other benefits available only to residents of the state.

Similar to an IRA, dollars in an ESA can be put to work in a wide variety of investment options including stocks, bonds and mutual funds. Funds can be withdrawn on a tax-free basis for education-related costs such as computers, tutoring and private school tuition. The maximum contribution is $2,000 per year per beneficiary. Parents must meet income requirements to qualify for contributions to an ESA.

Custodial Savings Accounts (UGMA/UTMA)

Custodial Accounts let you set aside money for a child’s education and other expenses.

Established under the Uniform Gift to Minors Act (UGMA) and the Uniform Transfers to Minors Act (UTMA), custodial accounts lack the immediate tax advantages of 529 and Coverdell Education Savings accounts. They do allow assets to be set aside for the benefit of a child without the need to create a special trust fund, and assets can be taxed based on the minor's income tax bracket (subject to "Kiddie Tax" rules). With these accounts, you control the investments (before the child reaches the age of majority of 18 or 21, depending on the state) but the child owns the assets. Monies deposited into a UGMA or UTMA are deemed an irrevocable gift. Once the child reaches the age of majority, the child takes control of the account.

When it comes to saving for an education—whether yours or a child's—you have many options. Before you talk with a financial professional, use the chart below for an "at-a-glance" comparison of 529, Coverdell and Custodial account options. Here are a few other things to think about:

A 529 Plan may be appropriate for you if you want tax-advantaged college savings account that helps maximize funding for higher education.

A Coverdell Education Savings Account may be appropriate for you if you're looking for a potentially tax-advantaged education savings account that can be used toward expenses related to primary, secondary or higher education.

A Custodial Account may be appropriate for you if you're interested in a brokerage account typically naming you or a spouse as custodian for the benefit of the minor, wherein all assets are irrevocable and belong to the child.

Product

529 Plans

Coverdell Accounts

Custodial Accounts

No federal taxes on current earnings

No federal taxes on qualified distributions

State tax benefits may exist

High limits on contributions

Investment choices are mutual fund portfolios only

Portfolios chosen by account owners/custodians

Original account owner maintains ownership

Account owner can designate new beneficiary

Can be used for primary/secondary schools

Deadline exists for full account distribution or transfer of ownership

Income cap to be eligible to open account

Non-qualified withdrawals are subject to all applicable federal and state income taxes, and may be subject to a 10% federal penalty. Please consult your tax advisor or legal counsel for advice and information concerning your particular situation.

To help make an informed decision about the options that may best help you work toward your education funding goals, you need to understand the often complex and subtle differences between the savings vehicles available today. Knowledgeable financial professionals at U.S. Bank and U.S. Bancorp Investments, Inc. can help.

It may be advantageous to accumulate assets in a 529 Savings Plan or ESA if applying for financial aid using the FAFSA process. Only about 5.6% of the value of your 529 Savings Plan or ESA will be calculated into your child's Expected Family Contribution (EFC). By contrast, up to 35% of the value of custodial accounts and the student’s own assets will be included in the EFC. The EFC affects the amount of need-based financial aid your beneficiary will receive; a higher EFC reduces the amount of financial aid and need-based scholarship money your beneficiary will qualify to receive. An important point is that savings accumulated in any plan or account should not affect the amount that can be received from merit-based scholarships.

The amount you need to save depends on where your child plans to attend college and the tuition required. You can use this College Planner calculator to help determine an estimate of how much you will need to save. You may be surprised just how expensive college can be. Even if it isn’t realistic to consider saving enough to pay all of the projected costs, keep in mind that other funding sources can be utilized, including loans, grants and scholarships.

Visit savingforcollege.com to get details on whether your state offers potential tax benefits for your contributions to their 529 plan. Before investing in a 529 College Savings Plan, consider your state of residence, which may offer a 529 College Savings Plan with state tax or other benefits available only to residents of the state. Contact your financial professional and tax advisor for more information. See disclosures for additional information.

If money is leftover in your 529 account after the beneficiary’s qualified higher education expenses have been paid, you can name another qualifying family member as the beneficiary in order to maintain the account. In the future, tax-free withdrawals could be used for the benefit of the newly-designated beneficiary’s higher education expenses. Alternatively, you can withdraw the money that is left over in your 529 account, but you'll have to pay a federal penalty tax of 10% on the earnings portion of the withdrawal (a state penalty may apply as well). You may also have to pay federal, and in some cases state, income taxes on the earnings portion of the withdrawal.

Yes. A qualified withdrawal may be taken from an ESA (tax-free) if the money is then placed into a 529 account for the same beneficiary. There is no penalty for this liquidation as long as the assets are placed into a 529 account.

Series EE or I-Bonds purchased after 1989 may be converted to a 529 plan tax-free if eligibility requirements are met. However, the bonds would have to be liquidated, since only cash can be contributed to a 529 plan.

Tax law typically specifies that income be taxed at the tax rate of the individual who receives it. Children typically earn less than their parents, making their earnings subject to a lower tax rate. However, the kiddie tax is a special tax that applies to a dependent child’s unearned income from investments. This tax applies once a dependent child’s investment income exceeds a limit, ($1,900 in 2011) at which time the investment income is taxed at the parent’s rate. For more information about how taxes on a custodial account apply to your situation, seek advice from a tax professional.

Funds in a Custodial account are under control of the custodian until the child reaches the age of majority, which varies by state. At that time, the child takes control of the account, and funds in it can be used for any expense, regardless of whether it is education-related.

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Investment products and financial services are provided through U.S. Bank and/or its affiliate, U.S. Bancorp Investments.

Investment products are:

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Before investing in a 529 College Savings Plan, consider your state of residence, which may offer a 529 College Savings Plan with state tax or other benefits available only to residents of the state. Contributions of up to $65,000 per person can be pro-rated over five years for gift tax purposes. Check with your tax advisor on whether you can take advantage of the gift and estate tax exclusions. If donor contributes more than $13,000 in one year and elects to apply the gift tax exclusion ratably over 5 years but dies before the close of the 5 year period, the portion allocable to calendar years beginning after the date of death is included in the donor's estate.

U.S. Bank, U.S. Bancorp Investments, Inc. and their representatives are not tax or legal advisors. When it is appropriate, you are encouraged to seek professional tax or legal advice.

Equity securities (stocks) are subject to stock market fluctuations that occur in response to economic and business developments. Investing in fixed income securities (bonds, debt securities) are subject to various risks, including changes in interest rates, credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors. Investment in debt securities typically decrease in value when interest rates rise. This risk is usually greater for longer term debt securities. Investments in lower rated and non rated securities present a greater risk of loss to principal and interest than higher rated securities.

Mutual fund investing involves risk; principal loss is possible. Investing in certain funds involves special risks, such as those related to investments in small- and mid-capitalization stocks, foreign, debt and high-yield securities, and funds that focus their investments in a particular industry. Please refer to the fund prospectus for additional details pertaining to these risks.

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